Premium Essay

Structural Macro Model

In: Business and Management

Submitted By hemangidesai22
Words 2451
Pages 10
Theme: “Beyond Perfect Competition – Markets in Reality”

Title of the paper: Imperfect Competition, Financial Market & Effective Demand

By
St. Xavier’s College, Kolkata
(Autonomous)
Hemangi Desai
Email: hemangi221@gmail.com
9874630182

Abstract:

We construct an effective demand model involving interaction between the real sector and the financial sector. The commodity market is imperfect. We explain price stickiness in terms of Kaleckian Mark-up pricing. The financial assets are money, government bonds and a risky asset, say equity or stock. The model is an extension of Krugman’s model of international financial multiplier and the model can explain not only the fall in asset prices but also its recessionary consequences. The paper also contains policy recommendations to overcome the financial meltdown.

JEL Classification: E60, E61.

Keywords: Mark-up pricing, financial meltdown, effective demand.

Section 1: Introduction
The global financial system is currently in meltdown. Stock markets have been falling most days, money markets and credit markets have shut down as their interest-rate spreads skyrocket, and it is still too early to tell whether the raft of measures adopted by the US and Europe will stem the bleeding on a sustained basis.
A generalized run on the banking system has been a source of fear for the first time in seven decades, while the shadow banking system - broker-dealers, non-bank mortgage lenders, structured investment vehicles and conduits, hedge funds, money market funds, and private equity firms - are at risk of a run on their short-term liabilities.
On the real economic side, all the advanced economies - representing 55 per cent of global GDP - entered a recession even before the massive financial shocks that started in late summer. So we now have recession, a severe financial crisis, and a severe banking crisis in the…...

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